Saturday, May 2, 2015

LIABILITY OF BANK IN BORROWER'S FAILURE TO RENEW INSURANCE POLICY

In Central Bank of India V Jagbir Singh CIVIL APPEAL NO. 3645 OF 2015 (Arising out of S.L.P. (Civil) 2343 of 2014 Hon'ble SC held that the Creditor Bank is not liable to pay compensation for non-renewal of insurance policy after referring the following law laid down by the SC:
In Pradeep Kumar Jain v. Citi Bank and another, Hon’ble SC while discussing Section 146 of Motor Vehicles Act, 1988 held as under: - 1 (1999) 6 SCC 361

“5. Under Section 146 of the Act there is an obligation on the owner of a vehicle to take out an insurance policy as provided under Chapter XI of the Act. If any vehicle is driven without obtaining such an insurance policy it is punishable under Section 196 of the Act. The policy may be comprehensive or only covering third parties or liability may be limited. Thus when the obligation was upon the appellant to obtain such a policy, merely by passing of a cheque to be sent to the insurance company would not obviate his liability to obtain such policy. It is not clear on the record as to the nature of the policy that had been obtained by the appellant earlier when he purchased the vehicle and which was to be renewed from time to time. It is also not clear whether even in the case of renewal, a fresh application has to be made by the appellant or on the old policy itself an endorsement would have been made. In the absence of such material on record, and the nature of the insurance policy or any anxiety shown by the appellant in obtaining the policy as he could not ply such vehicle without such an insurance policy being obtained, he cannot claim that merely because he had passed on the cheques, the entire liability to pay all damages arising would be upon the first respondent.” 
Further a Three-Judge Bench of this Court, in HDFC Bank Ltd. v. Kumari Reshma and others, further explained the law relating to liability of the creditor bank, and it has been held that the liability of such bank to get the vehicle insured is only till the vehicle comes out on the road. In other words, 2 AIR 2015 SC 290 the creditor bank is not liable to get renewed the insurance policy on behalf of the owner of the vehicle from time to time. Paragraphs 23, 24 and relevant parts of paragraph 25 of that judgment are reproduced as under: -

“23. In the present case, as the facts have been unfurled, the appellant bank had financed the owner for purchase of the vehicle and the owner had entered into a hypothecation agreement with the bank. The borrower had the initial obligation to insure the vehicle, but without insurance he plied the vehicle on the road and the accident took place. Had the vehicle been insured, the insurance company would have been liable and not the owner. There is no cavil over the fact that the vehicle was subject of an agreement of hypothecation and was in possession and control under the respondent no.2. The High Court has proceeded both in the main judgment as well as in the review that the financier steps into the shoes of the owner. Reliance placed on Mohan Benefit Pvt. Ltd. v. Kachraji Rayamalji & ors. [(1997) 9 SCC 103], in our considered opinion, was inappropriate because in the instant case all the documents were filed by the bank. In the said case, two-Judge Bench of this Court had doubted the relationship between the appellant and the respondent therein from the hire-purchase agreement. Be that as it may, the said case rested on its own facts. The decision in Rajasthan State Road Transport Corporation v. Kailash Nath Kothari & others [(1997) 7 SCC 481], the Court fastened the liability on the Corporation regard being had to the definition of the ‘owner’ who was in control and possession of the vehicle. Similar to the effect is the judgment in National Insurance Co. Ltd. v. Deepa Devi & ors. [(2008) 1 SCC 414]. Be it stated, in the said case the Court ruled that the State shall be liable to pay the amount of compensation to the claimant and not the registered owner of the vehicle and the insurance company. In the case of Godavari Finance Company v. Degala Satyanarayanamma and others [(2008) 5 SCC 107], the learned Judges distinguished the ratio in Deepa Devi (supra) on the ground that it hinged on its special facts and fastened the liability on the insurer. In Uttar Pradesh State Road Transport Corporation v. Kulsum and others [(2011) 8 SCC 142], the principle stated in Kailash Nath Kothari (supra) was distinguished and taking note of the fact that at the relevant time, the vehicle in question was insured with it and the policy was very much in force and hence, the insurer was liable to indemnify the owner. 24. On a careful analysis of the principles stated in the foregoing cases, it is found that there is a common thread that the person in possession of the vehicle under the hypothecation agreement has been treated as the owner. Needless to emphasise, if the vehicle is insured, the insurer is bound to indemnify unless there is violation of the terms of the policy under which the insurer can seek exoneration. 25. In Purnya Kala Devi v. State of Assam & Anr. [2014 (4) SCALE 586], a three-Judge Bench has categorically held that the person in control and possession of the vehicle under an agreement of hypothecation should be construed as the owner and not alone the registered owner and thereafter the Court has adverted to the legislative intention, and ruled that the registered owner of the vehicle should not be held liable if the vehicle is not in his possession and control……..”

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